I’ll be honest: I have no idea where oil prices will go over the next few months. Short- and intermediate-term price prediction is a difficult game that I have no interest in.
However, there are no end of predictions about tumbling oil prices right now, with some as dire as $50 per barrel. But others, like energy guru T. Boone Pickens, think we’ll recover back to more than $100 in 19 months or less.
I tend to lean toward Mr. Pickens’ opinions, as he has more on-the-ground oil field experience than most observers, but even that is no guarantee of success.
I may not be a great predictor but I do have a fairly sharp pencil and have over the years done a pretty good job of finding really cheap stocks and holding them until conditions and valuation improved. I won’t claim any real genius, though — everything I have learned about stock picking I stole from Ben graham and his many students over the years.
Shortly before he passed away Ben Graham left us a 10 point checklist for finding safe, cheap stock that will outperform the market over time. That checklist has worked pretty well very the years. In their book, Quantitative Value, Tobias Carlisle and Wesley Gray tested the approach and found that it beat the market by more than 50% between 1976 and 2011.
The checklist provided for several financial safety checks as well as earning and dividend requirements and suggested that the stocks should only be bought when the PE ratio multiplied by the price-to-book-value ratio was less than 22.5. This has come to be known as the Graham number over the years.
When I apply the strict financial criteria and value using the Graham number I find that some energy stocks are starting to make their way onto the list of safe and cheap stocks.
Cheap Stocks — Helmerich & Payne (HP)
Helmerich & Payne, Inc. (HP) operates as a contract drilling company in the U.S., South America, the Middle East, and Africa. The company currently has a fleet of 333 land rigs in the U.S., 37 international land rigs, and 9 offshore platform rigs. While things may get tough in the oil patch it is worth noting that Helmerich & Payne just reported record revenues, earnings and drilling activity.
CEO John Lindsay said that, regardless of ricing developments, his company was “very well prepared for any type of softening in the market.”
HP stock has fallen almost 20% in the past month and is trading at just 80% of its Graham number valuation. The company has very little long-term debt, and the current ratio is 2.5 so there’s a margin of safety in the financial statements. Right now HP stock is yielding more than 4%, so it makes for a decent income stock at current levels.
It is worth noting that there were several energy stocks including blue chips like Chevron Corporation (CVX) and BP plc (ADR) (BP) that are very close to passing the majority of the checklist filters and trading at a large enough discount to their Graham number to qualify as Ben Graham bargains. If oil prices stay down around current levels for a while, we could see more of the stocks qualify as safe and cheap stocks worthy of purchase.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.
